The UK homebuilding industry is in rude health, which is good news for investment bank Moelis & Company. It enjoyed a productive 2017, with its advisory role in Bridgepoint's £655m acquisition of Miller Homes, and the subsequent bond sale, a high point, as Edward Russell-Walling describes.

Moelis team

UK housebuilding has been enjoying good times, underpinned by low interest rates, government support for first-time buyers and the wide availability of mortgages. One result has been an uptick in capital market activity. Moelis & Company, which reckons itself the leading investment bank in the UK housebuilding segment, has been a beneficiary.

Moelis celebrated its 10th anniversary in 2017, having been founded in New York by former UBS banker Ken Moelis in June 2007. The London office was opened towards the end of the following year.

The firm's London-based head of Europe, the Middle East and Africa (EMEA) and Asia investment banking is Mark Aedy, a former Merrill Lynch banker whose relationships with UK housebuilders date back to the mid-1980s. Some have lasted for decades – he worked on the initial public offering (IPO) of Bovis Homes in 1997, for example, and conducted a successful bid defence for the company in 2017.

Mr Aedy is bullish on the sector, and believes it will remain "stronger for longer", supported by a benign bank lending market and "incredible" capital discipline, which includes low leverage.

Positive vibes 

Making his regular address to the annual Home Builders Federation conference in 2017, Mr Aedy said that a combination of positive factors made him cheerful about the industry's outlook for the fifth year in a row in the UK. 

His reasons included a positive macro environment, together with positive demographics, historic underbuild and supportive government policy – including a promise to give another £10bn ($13.75bn) to the official Help to Buy scheme. Housing affordability remained manageable, and he described the land market as "remarkably benign,” adding: "I do not see that changing soon."

In addition to the Bovis defence, Moelis's more recent UK housebuilding credentials include the recapitalisation of both McCarthy & Stone and Morris Homes and, perhaps most notably, 2017's acquisition of Miller Homes by private equity house Bridgepoint. This was accompanied by a high-yield bond offering, the largest ever in the UK housebuilding sector. Moelis was exclusive financial adviser to Bridgepoint on the £655m acquisition and on the bond sale.

Edinburgh-based Miller was established in 1934, and later expanded into England. Following the financial crisis of 2008, a minority stake in the family business ended up in the hands of various banks. GSO Capital, Blackstone’s credit arm, took a controlling stake in 2012, and helped to recapitalise the business over the next five years. Other selling shareholders included Caird Capital, Lloyds Bank and Noble Grossart.

After the loss-making construction arm was sold, an IPO of the homes business – with Moelis as adviser to GSO – was withdrawn in 2014 thanks to market volatility. The float had been expected to value the company at £450m. "We recommended pulling and [GSO] agreed," says Mr Aedy. "It made more money by waiting."

Mr Aedy also knew the senior members of the Bridgepoint management team, including the CEO and chief information officer, having worked with them 30 years earlier. "They had recently started to look at housebuilding, and they knew Moelis had a good position in the sector," he says.

A new paradigm 

Housebuilding had not been a natural stamping ground for private equity, which has never cared for the cyclicality and cash-consuming growth that have characterised the industry. "It's now different in the UK, where constrained financing ability to small and mid-size housebuilders has created a new paradigm of stability in the land market, and consistently superior returns for the majors," says Moelis managing director Anthony Doeh, who works on housebuilding mandates alongside Mr Aedy while also leading the firm's coverage of the business services sector.

In the current market, housebuilders have been growing but still delivering cash, according to Mr Aedy. "The sector is on a return on capital of 20%-plus," he adds. "There are not many who can say that – and it is unlevered." Strong fundamentals were an important part of Bridgepoint's decision to buy into the sector.

There was never a formal sale process, and Moelis was not engaged by GSO to find a buyer. But an informal process began to gather momentum from the beginning of 2016. Given Bridgepoint's new interest in the sector, Moelis had helped the firm look at other possible candidates, and then it emerged that Miller was available.

"A number of players showed interest, but there was not a significant amount of auction tension," says Mr Doeh. "Bridgepoint had the most conviction."

The private equity house was in no rush, however. "It was typically thorough," Mr Aedy says. "It was very informed on consumer finance and behaviour, with a good reading of the UK and European macroeconomy."

Solid foundations 

The company over which Bridgepoint was running its slide rule was by now the largest private UK housebuilder by number of completions. It held a leading strategic land bank and had been back on a growth path for the previous four years. In 2016 its operating margin was 18.2%, with an average return on capital employed of 24.3%. While it completed 2380 units in 2016, it has also undertaken to increase its targeted capacity to 4000 units a year by 2020, 68% higher than current levels.

The management team is led by Chris Endsor, who was appointed CEO in 2011. He has 34 years of industry experience, and previously founded Birch, which was acquired by Miller in 2000.

The acquisition was announced in August 2017 and closed in September. The purchase price of £655m represented 1.3 times the total gross asset valuation. "That was an attractive entry multiple for Bridgepoint," says Mr Aedy.

The transaction was financed by a 100% committed bridge, to be taken out with a ground-breaking high-yield bond issuance. The financing would not follow the standard model for British housebuilders. "US housebuilders borrow from the capital markets, but in the UK their debt has been predominantly senior bank provided," says managing director Francesco Del Vecchio, Moelis's head of EMEA debt capital markets.

Miller's new financing package would not only use the capital markets but would also push the envelope in terms of leverage and size. It would be wholly in sterling, notwithstanding the uncertainties around Brexit and the UK economic outlook.

The package included a super-senior £105m revolving credit facility, with £80m to fund working capital and the balance to provide letters of credit for land purchases. "We ran different scenarios – base case, recession, upside and variants thereof –­ and, as designed, the revolver will provide optimum flexibility and liquidity to the borrower," says Mr Del Vecchio. The financial covenant construct is tied to asset values rather than to more traditional leverage metrics.

Then there were two tranches of high-yield bonds – one fixed rate, one floating rate. Barclays, Deutsche Bank and HSBC provided the lion's share of the £425m bridge financing, and were joint bookrunners on the bond transaction.

"A significant portion of the bonds is repayable at par within one year, with no penalty on the floating rate tranche," says Mr Del Vecchio. "This provides additional flexibility to Bridgepoint."

Stronger for longer 

The £425m high-yield offering effectively opened the market for housebuilders, creating a new benchmark in the European high-yield market. Price talk for the fixed rate was launched at 5.75% to 6%, and Libor plus 525 basis points (bps) to 550bps for the floating rate note.

Given there was no existing benchmark, there was a process of "real price discovery" says Mr Del Vecchio. "Given Miller's credit strengths and Bridgepoint's sponsorship, the bonds were well received by the market," he says. The floaters priced at the low end of the price talk range and the fixed rate priced inside it. The £175m floating rate tranche ultimately printed at Libor plus 525bps and the £250m fixed rate piece at 5.5%.

The bond offering was four times oversubscribed and distributed to more than 75 investors. "The company is highly regarded, and Bridgepoint is a much-respected name," Mr Aedy says by way of explanation. "And the institutions supported our 'stronger for longer' case."

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